Month: April 2018

The robo-advisor platforms offered by companies like Wealthfront and Betterment are gaining in popularity. The low cost of investment management services is very attractive when compared to fees charged by human financial advisors. It leaves me wondering if financial advice from humans is on its way out.

Advances in artificial intelligence has already replaced some money managers at companies like Blackrock. Last October marked the debut of an AI powered equity ETF. The exchanged traded fund is run by IBM’s Watson, in other words, the new portfolio manager is a computer program. Most ETFs are passively managed and follow indexes or specific sectors in the S&P 500. The AIEQ ETF is an actively managed security that seeks to beat the market.

Here are four advantages that traditional advisors have over robo-advisors.

Human emotions

Robo-advisors only have one job, to use algorithms to manage your investment portfolio. They are not designed to manage the emotional component of investing and building wealth. For traditional advisors, this is a daily role they fulfill. When markets decline or clients experience an important financial event, the traditional advisor is there to talk them down off the proverbial ledge and help them make a rational decision void of strong emotions.

Accountability

Many people are capable of holding themselves accountable on their own but having someone else committed to helping you in the endeavor only ups your chances of success. Computers are certainly capable of creating tasks and sending you reminders but they have little to no flexibility in helping you devise an accountability system that truly works for you and is tailored towards your specific goals.

Flexibility

Let’s face it; over time our lives can change quite drastically. You get married, have kids, buy a house or become unemployed. The list goes on and on. Each of these events creates what we call “money in motion.” When money is in motion, planning, adjusting and taking thoughtful action needs to occur in order to ensure a positive outcome. Over time, many discussions are required during this process and having a human expert helps you adjust and adapt as needed.

One-size-fits-all vs. tailored service

Part of why robo-advisors are cheap, relative to financial advisors, is due to the fact that they are a streamlined, automated service. As great as this can be, it also creates a lot of limitations. Rather than being built and catered specifically to you and your current financial situation, robo-advisors are designed to serve the masses. This means a somewhat cookie-cutter, one-size-fits-all approach in their offerings.

Having worked as a financial advisor, I am somewhat bias and prefer the traditional advisor over the robo-advisor. However, a robo-advisor provides a service to a select group of clients and financial advisors provide services to a different group. Each cater to the preferences of their unique clientele.

In the political terms, President Xi Jinping runs a communist country that has just granted him the ability to rule for life.He enjoys advantages that may allow him to cope with the economic fallout far better than President Trump. His authoritarian grip on the news media and the party means there is little room for criticism of his policies, while Trump must contend with complaints from American companies and consumers before important midterm elections in November.

The Chinese government also has much greater control over their economy, allowing it to shield the public from job cuts or factory closings by ordering banks to support industries suffering from American tariffs. It can spread the pain of a trade war while tolerating years of losses from state-run companies that dominate major sectors of the economy. In addition, China is also sitting on top of about $3 trillion in surplus cash.

At best, the American actions could shave one-tenth of a percentage point off China’s economic growth. Not enough to force a drastic reversal of policies, given the enormous benefits that Chinese leaders see in the state-heavy economic model they have relied on in recent decades.

Chinese tariffs on the American agricultural sector is very influential in the Congress. Many states that have voted republican in the past will be hardest hit by these tariffs.

“Hopefully the president is just blowing off steam again but, if he’s even half-serious, this is nuts,” said Senator Ben Sasse, a Republican from Nebraska, “China is guilty of many things, but the president has no actual plan to win right now. He’s threatening to light American agriculture on fire.”

In addition to agriculture, China threatened to retaliate with tariffs on American cars, chemicals and other products. The 106 goods, many produced in parts of the country that have supported Mr. Trump, were selected to deliver a warning that American workers and consumers would suffer in a protracted standoff.

The mere talk of a possible trade war has sent investors on a rolling coaster ride of uncertainty. The six month chart of the S&P 500 below clearly illustrates increased volatility.

China also has the upper hand because it holds $1.2 trillion dollars of American debt. Trump’s tax cuts and infrastructure spending will require issuing more debt. The U.S. government has relied on foreigners to purchase treasuries to finance their spending because American saving rates are so low and they can’t participate fully. Add the fact that the biggest buyer of treasuries was the Federal Reserve which has started to sell it’s holdings.

What would happen to the bond yields if China doesn’t buy additional American debt?

The economic law of supply and demand dictates that more supply will cause prices to fall. If bond prices fall then yields will go up, causing interest rates to raise. Wage and price pressures are already rising, higher tariffs would only intensify these pressures forcing the Fed to raise interest rates even more.

A worst case scenario, the talking war turns into a trade war that could slow U.S. growth, tank the stock market and cause a U.S. recession.

President Trump is approaching this like does everything else, by talking tough and expecting his opponent to give in. Unfortunately for Trump, it’s not the 80s anymore. China was dramatically underdeveloped then and it wanted access to Western technology and manufacturing techniques. China is relatively mature today and it can easily obtain what it needs from other vendors outside the United States. While the U.S. market looked enticing a few decades ago, Beijing is more interested in newer emerging market countries.

Trump is not only gambling his political future but the financial well-being of Americans if he starts a trade war.